Friday, January 15, 2010

Macro-economic inflationary pressures and the potential collapse of the carbon credit market are two emerging risks in 2010, according to Lloyd's of London's 360 Risk Insight.360 interviews Daniel Golding, a risk analyst at Lloyd’s insurer Chaucer, who warns of the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency.“This is an emerging risk due to factors such as quantitative easing [i.e. increasing the money supply by printing more money], increasing government debt, inconsistencies in the CPI index and a peak of oil production," Golding is cited as saying in 360. “All of this will likely contribute to a significant increase in inflation over the next year.”Golding went on to say that ongoing instability in the U.S. or U.K. economy could lead to a second financial crisis.“Debt-to-GDP ratio for all levels of U.S. government debt is 87%, but inclusive of household and business debt and government-sponsored enterprises the ratio rises to 331%. Inclusive of Social Security and Medicare, the ratio rises to 1,000%.“This is unsustainable and could result in a financial crisis far greater than that experienced to date,” he warned.On the subject of cutting CO2 emissions, Golding said he is concerned carbon credits are being packaged into increasingly complex financial products — similar to the “shadow finance” around subprime mortgages — that triggered the recent economic crash.“As recession slashes output, companies pile up permits they don’t need and sell them on,” 360 quotes Golding as saying. “The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters.”